IPO Note: BSE Limited - HDFC Securities

HDFC Sec | Jan. 15, 2015, midnight

Background & Operations:

BSE owns and operates the BSE exchange platform (formerly, the Bombay Stock Exchange), the first stock exchange in Asia, which was formed on July 9, 1875. At the end of October 2016, the BSE was the world's largest exchange by number of listed companies, and India's largest and the world's 11th largest exchange by market capitalization, with US$ 1.7 trillion in total market capitalization of listed companies. As the operator of the BSE, it regulates listed issuers and provides a market for listing and trading in various types of securities as may be allowed by SEBI from time to time. It operates in three primary lines of business, namely:

1. The listing business, which consists of the primary market, which relates to the issuance of new securities;

2. The market business, which consists of (i) the secondary market, which relates to the purchase and sales of previously-issued securities, (ii) BSE StAR MF ("BSE StAR"), its online platform for the placement of orders and redemptions of units in mutual funds, (iii) NDSRST, its platform for the reporting of over-the-counter corporate bond trading, (iv) membership, which includes membership in the Exchange, membership in its clearing corporation ICCL, and depository participants in its depository CDSL, and (v) post-trade services, namely the clearing corporation and depository; and

3. The data business, which consists of the sale and licensing of information products. In addition to the primary lines of business, BSE also have supporting businesses, including (i) providing IT services and solutions, (ii) licensing index products such as the S&P BSE SENSEX, (iii) providing financial and capital markets training and (iv) operating corporate and social responsibility portal. Moreover, it has an active treasury function focused on managing cash, including both its own funds as well as funds that it hold on behalf of third parties (such as margins placed by clearing members).

As at September 30, 2016, the BSE had 1,446 unique members across all segments, and in Fiscal Year 2016 the BSE accepted an average of 284.92 million orders and 1.55 million trades in equity shares per trading day, placing it as the 12th most active exchange in the world in terms of electronic book trades in equity shares. During Fiscal Years 2014, 2015 and 2016 and the six months ended September 30, 2016, the BSE reported 24,663 million, 63,385 million, 70,376 million and 31,237 million electronic book orders in equity shares, respectively. BSE engage in extensive monitoring of its members, listed companies and of market activities in order to minimize the risk of default, promote market transparency and integrity. By doing so, it along with other Indian stock exchanges contribute to the growth of the Indian capital markets and stimulate innovation and competition across market segments.

BSE derives revenue from a number of sources, including securities services, services to corporate, data dissemination fees, investments and deposits, and other sources. For FY 2014, FY 2015 and FY 2016 and the six months ended September 30, 2016, its revenue from operations was Rs. 2,667.9 million, Rs. 3,611.4 million, Rs. 4,265.4 million and Rs. 2,421.8 million, respectively, and its net profit after share of minority and share of loss of associate as restated was Rs. 1,351.9 million, Rs. 1,297.4 million, Rs. 1,225.3 million and Rs. 1049.3 million, respectively.

Objects of Issue:

The objects of the Offer are to achieve the benefits of listing the Equity Shares on NSE and for the sale of Equity Shares by the Selling Shareholders. Further, the Exchange expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to its existing Shareholders. The Exchange will not receive any proceeds of the Offer and all the proceeds of the Offer will go to the Selling Shareholders in the proportion of the Equity Sharesoffered by them.

Business Strategy:

Strengthen position to become the exchange of choice in India and expand cross-border reach by entering into strategic alliances: BSEintends to strengthen its position as a preferred exchange in India and expand its cross-border reach by entering into strategic alliances. Internationally, it has signed an agreement with Deutsche Boerse whereby they sell and market BSE market data and information to international clients. Further, it is a member of the BRICS Exchanges Alliance, whereby leading exchange in Brazil, Russia, India, China and South Africa cross-list futures products based on the flagship indices of each of the other exchanges. Similarly, options and futures based on the S&P BSE SENSEX are listed and traded on Eurex and the Dubai Gold and Commodities Exchange, and it has entered into an MOU with the Korea Exchange to cooperate in other areas such as research, product development and information technology. BSE has also partnered with IFC, a member of the World Bank Group, to develop a corporate governance scorecard, which allows companies to assess their corporate governance performance against national and international benchmarked practices. The enhanced ease of trading and access that results from such ventures will strengthen its ability to attract cross-border investors and issuers to its exchange.

Increase variety and market share of derivative products: BSE actively evaluate products and asset classes outside its traditional focus areas in order to diversify its revenue sources. By doing so, it seeks to continue to attract market participants and issuers and to capture the significant revenue potential that comes with a broader product line, particularly derivative products. It intends to continue to develop a full equity derivative product suite to meet derivative investors' needs through the introduction of new products, as well as through advancements in current products, such as interest rate and currency derivatives, index futures, index options, single stock futures and single stock options. In particular, BSE intends to focus on currency derivatives and to further increase its market share in this segment through initiatives such as introducing new products (such as index contracts, inter-currency spread contracts and crosscurrency derivatives, in each case subject to regulatory approvals), increasing foreign portfolio investor ("FPI") participation and extending market timings for currency derivatives (subject to regulatory approval). It is also looking to add commodity derivatives to its current portfolio of product offerings.

Diversify product and service offerings and maintain new product innovation and development:BSE continually strive to diversify its product and service offerings to serve investors' needs by developing new products and bringing new types of financial instruments. It intends to enhance current product offerings, such as BSE StAR, its mutual fund investment platform, by adding new purchase and settlement options for investors. The number of mutual fund schemes available on BSE StAR grew from 4,891 in FY 2014 to 5,724 in FY 2015 and 5,989 in FY 2016 and 6,303 in the first half of FY 2017. In terms of its service offerings, it was appointed as the receiving office for primary issuances of sovereign gold bonds in June, which are government bonds, denominated in grams of gold, issued by the Reserve Bank of India on behalf of the Government of India.

Maintain and improve best-in-class platform infrastructure:Maintaining and improving infrastructure is critical to BSE’s business, as it lays the foundation for future growth and expansion, provides its customers with a more efficient and accessible marketplace and enhances its competitiveness as an exchange operator on a global scale. It has regularly allocated substantial resources towards upgrading its information technology systems, with the over-arching goals of achieving higher capacity and lower latency, improving market efficiency and transparency, enhancing user access and providing flexibility for future business growth and market needs. BSE undertake to develop and to implement initiatives to maintain and improve its platform infrastructure in the future. It prioritizes the improvement in its cyber-security framework and information security management systems.

Establish an international exchange at GIFT City:BSE intend to establish an international exchange in the Gujarat International Finance Tech City – International Financial Service Centre ("GIFT City"), a multi-services Special Economic Zone that is currently being developed as India's first international financial services centre. Subject to receipt of the necessary regulatory approval, the international exchange will provide an electronic trading platform that facilitates (i) Indian companies to raise capital in foreign currency by issuing foreign currency denominated bonds and providing a trading platform to trade in such securities, (ii) Indian start-ups to raise equity from foreign investors by getting listed on the international exchange and (iii) companies incorporated outside India to raise money in foreign currencies by the issuance and listing of their equity shares on the international exchange. Establishing this exchange will increase BSE’s brand's profile and also provide with additional sources of revenue. As it intends for the proposed exchange to offer equities in non-Indian issuers for trading, the project will also include establishing a clearing corporation as well as a depository to settle such trades. It proposes to begin operating the GIFT City exchange after, among others, the publication by SEBI of final regulations applicable to the exchange. BSE’s track record of operating an exchange and entering into partnerships and alliance with partners around the world will facilitate the opening of the GIFT City exchange by it in a timely manner once the final regulations applicable to the exchange have become effective.

Capture growth in the underpenetrated Indian financial markets:With a growing young population in India, more investors are likely to enter the market in the coming years. In order to capture growth in the Indian market, BSE undertake routine outreach and advertising programs, such as through educational activities targeted towards youths to teach them about the benefits of investing in securities, and through investor awareness activities designed to facilitate an "equity culture" in India. In addition to investor outreach, it also design platforms and products targeted towards specific demographics in India, such as a mobile phone enabled trading platform, targeted towards the growing number of mobile phone users in India. BSE is positioned, as a well known exchange, to increase the number of investors trading on its exchange as first-time investors begin taking advantage of such government schemes. In addition, it plans to focus its education outreach programs, directly through the exchange as well as through its BSE Institute, on this sector of first-time retail investors in order to increase its brand recognition and to encourage such investors to trade in BSE-listed securities. It also run custom courses for businesses and colleges. Moreover, the Employee Provident Fund Organization has recently started investing in ETFs, which is an indirect way of investment into the Indian stock market.

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